Care and Feeding of the High-Performing Physical Supply Chain Network

Your physical supply chain network may be closer to a living organism than you think. Recent developments suggest that previous conceptions of a supply chain as a purely mechanical process may now be outdated. Customer needs, market expectations and business objectives change ever more rapidly. Products that used to be manufactured and shipped for one-time sale are turning into service-based offerings. A lean but rigid or ‘lifeless’ supply chain network may give good results today, but be significantly out of step tomorrow.

Customer Satisfaction

Physical supply chain networks need to adapt and grow to fit their environments. This is the only way to maintain good performance in terms of end-customer satisfaction and profitability. At the same time, such networks often have a number of components in common and respond in a similar way to proven techniques for improvement. While leaving the door open for innovation, aligning physical supply chain networks to properly match needs and exploit opportunities means first understanding what they contain and how – in general – they work.

A Look inside the Supply Chain Network

Any physical supply chain network has the same basic goals: to optimize the flow of finished goods or services to the market in a way that creates and keeps satisfied, loyal customers, while making sufficient profit for supply chain network operator. The components and linkages that make this happen can vary considerably. So can the length of the network from one end to the other, depending on the point of view being taken. An important point to be made is that in most cases the supply chain network must extend both upstream back to raw goods or component suppliers, and downstream to distributors, resellers and the end-customer. In other words, an organisation’s supply chain network goes further than its own operations on its own premises.

Physical Locations, Transport and Management Systems

Transport Management Systems

The parts of a physical supply chain network can be grouped into three categories: locations for storing or transforming products; transport systems for bringing in supplies and delivering output; and systems for managing items in the first two categories.

Physical locations. These include warehouses for storing raw materials, work in progress and finished goods, as well as the production facilities for manufacturing those goods. Downstream locations may then include distribution centres (owned or rented), retail shops and end-customer premises. Upstream, there are your suppliers’ premises. Upstream and downstream, there may also be further warehouses, cross-docking facilities (to avoid the need for warehouses), freight depots, rail freight centres, ports, and intermodal terminals.

Transport systems. Conventional transport solutions may come to mind, like vans, trucks, trains, ships and cargo planes. However, courier motorbike services may make sense in some instances, helicopters in another, and bicycles in yet another.

Management systems. Nowadays, there is at least one type of digital or cloud computing management system available for each component or link in the supply chain network. Some systems manage more than one component. Others are designed to readily accept or transmit supply chain network information from or to other systems. On the whole, physical supply chain networks rapidly become too complex to be managed by anything other than a software-based solution.

Examples of software applications are those for warehouse and inventory management, order management, transport management, demand forecasting and integrated supply chain software suites. These may then integrate with an organisation’s ERP (enterprise resource planning), financial, sales and CRM (customer relationship management) applications.

How Much of the Above Does Your Enterprise Own?

While you may need to work with some or even all of the items above, you will not own all of them. In cases where outsourcing of a physical supply chain network has been pushed to the limit, a company may not even own any of them. A number of brand-name companies make extensive use of outsourced manufacturing, distribution and sales facilities. They add their own value through marketing innovation and creativity, but they may never physically handle their own products. Yet this does not mean they can ignore the physical supply chain network that works for them. Supply chain, whether done by you or for you, has the same strategic importance to your organisation.

New Challenges When Your Network Crosses National Boundaries

Physical supply chain networks that spread internationally bring additional opportunities and problems. You may decide to extend over the border upstream in order to access better components or cheaper supplies. You may multiply your downstream activities in foreign countries in order to access new markets. You may do both at the same time, because, for example, local supply and production in another country makes more sense in order to sell to that country’s market.

local supply and production in another country

The supply chain advantages may be there. The added complexity will certainly be there. Initial cost savings projections may dwindle when the expenses of any extra shipping charges, logistics set-up fees, travel between different locations and time to achieve operational efficiency are all factored in. These items can be accounted for or modelled in a PC spreadsheet application. Currency variations and differences in tariffs and tax laws add further spice to the exercise.

On the other hand, one critically important aspect of running an international physical supply chain network cannot be easily modelled by computer, or even not at all. It is business culture. Even over relatively short distances, significant cultural gaps can appear.

In Europe, Denmark and Belgium are separated by a few hours by car. Belgium has a reputation for being cautious and avoiding uncertainty and change. In Denmark, the reverse is true: healthy risk management for higher gain is integrated into the Danish way of doing business.

Across the globe, China and Australia, or Japan and America, are further examples of different business cultures. China and Japan take longer-term views and accord more importance to hierarchy and authority, compared to the shorter-term, ‘just do it’ attitudes of many predominantly English-speaking countries.

Different Types of Supply Chain Networks

There are as many different networks in operation as there are organisations that operate them. However, here is an overview of how some well-known enterprises organise their supply chain networks to meet their own particular operating requirements.

Unilever – consumer packaged goods. Unilever progressively reduced its physical locations from 30 warehouses to 5 large distribution centres. The emphasis is on cross-docking so that goods shipped out from factories only transit via the DC and are not stored there. Through increased collaboration with its retailers, the company gets more of its products on retailers’ shelves more often (increased customer satisfaction) and cuts its levels of inventory (better profitability).

H&M – fashion retailer. Life for items of fashion apparel starts in the company’s headquarters in Stockholm, Sweden. The designs are used by their 20 production locations in Asia (for longer lead time products) and Europe (for faster turnaround). Store replenishment is a key focus and H&M manages inventory via a distribution centre in each country. The company is the importer, distributor and retailer in each case. It does however outsource transport.

Ford Motor Co. – automotive manufacturer. Supply chain information and functionality is handled in one global material manufacturing system. Ford’s suppliers get access to the system for real-time stock and shipping information. Supplier deliveries are coordinated by a third party logistics provider to ensure efficiency through full truckloads of parts and components. ‘Destination’ transport accounting to get cars to dealer showrooms is a challenge because transport is not billed by distance, but as an average calculated over all shipments being made.

Maytag – Durable goods/appliances. Maytag not only went full ‘cross-dock’, but also set up joint distribution facilities with a large retailer (Best Buy Co. Inc.) and one of its competitors at the time, which was Whirlpool (Whirlpool and Maytag later merged). The joint facilities saved expenses and time. A Best Buy order place in the morning would be delivered by midday from the Maytag zone to the neighbouring Best Buy zone (by simply opening a door and pushing the goods through) for immediate final delivery.

PepsiCo Inc. – Food and Beverage. PepsiCo uses a direct store delivery model that eliminates warehouses, a key step in getting perishable goods to retailers in a timely way. The company also leases space directly within large grocery chain stores to directly manage its inventory on behalf of the retailer. In addition, PepsiCo has a large-scale return logistics programme in which it collects its empty bottles to return them to bottling plants for re-use.

What Makes a Physical Supply Chain Network Tick?

If you want to make it better, you need to know how it works. Mathematics and models can help, even though we know from the above that they cannot tell us everything. They can however help to better understand network design trade-offs like fixed/variable costs, or stockholding/transport costs. They can also provide a means of comparing the risks of different scenarios. Two network designs may for example offer similar performance for the same cost, but be subject to different risks. For example, a solution depending more on transport will be more exposed to wider fluctuations in fuel prices.

By correctly understanding the input and output of the network, or the supplier/upstream and customer/downstream ‘bookends’, we can then use network design techniques to make smarter decisions on:

Making products or providing services ourselves, or outsourcing to third parties

The size, number, location and specialisation of any production plants we operate

The size, number, location and market sector served for each warehouse and DC

Our leeway in improving service levels compared to costs then incurred

How changes in market needs or demand, raw material prices and labour costs will affect the profitability of the network being envisaged or the level of satisfaction of customers being served

Flexibility to be built in to cope with changes in demand in the future, whether on a seasonal basis or as a continuing trend.

Some principles apply in all cases. They include designing the network to support the organisation’s supply chain strategy (and not vice versa), favouring solutions with the lowest total cost, and minimising the number of times a deliverable is handled as it moves through the network (to reduce both costs and potential errors and damage).

The Perils of Getting It Wrong!

In the best case scenario of a faulty physical supply chain network, an enterprise loses money. Leaders tend to spend around 4% of their revenue on supply chain costs. Others in the same sectors may spend up to 10%. Sometimes this discrepancy is hidden in the company accounts. At other times it surfaces and threatens serious career impacts. Senior executives may then try to right the different wrongs, but can only improve things if they have the right information – which in theory should already have been used to drive down costs. They also have to remember that supply chain networks extend beyond the company premises and share information appropriately with suppliers, distributors and retailers.

In the worst case scenario, supply chain network malfunctions cause customers to defect to the competition, the company share price to collapse (up to 12% in certain cases), and possible bankruptcy. If a supply chain network is not being continually scrutinised and adjusted to tolerate potential glitches and discontinuities, it will diverge, ossify, and then break.

Continual Care and Feeding is the Conclusion

Physical supply chain networks will not be perfect. There will always be a gap between the best possible solution and what you have today. The aim is to keep that gap as small as possible and prevent your network going off at a tangent compared to a change in market or business direction. With the variety of designs being used, there are often interesting lessons to be learned. Copying a network blindly will not work, but smart moves to cut costs and enhance customer appreciation often lend themselves to healthy imitation. The right combination of stable, cost-effective investment and outsourcing of cost-sensitive resources will let you mix and match appropriately to keep your physical supply chain network flexible, adaptable and aligned with your business.